Passing from September to October, and into the final three months of the year, the storm clouds – unsurprisingly – remain very much in view. That is not to say that there won’t be some better news flow to soothe frayed nerves (most likely the widely anticipated bounce in the Q3 GDP data). But even if this is indeed the case, the headwinds to economic growth are likely to remain pretty challenging for some time to come. Few would, after all, bet on an early end to the sovereign debt crisis in the euro area. Meanwhile even if the Chancellor shows flexibility in jettisoning the second of his budget rules in his forthcoming Autumn Statement, policy is set to tighten significantly over the next few years. To this end, it was interesting to see the minutes of the September MPC meeting indicate that several members still have a policy easing bias, and feel ‘additional (monetary) stimulus was more likely than not to be needed in due course’. The improvement in the labour market remains one of the most surprising aspects of this current economic climate. In the three months to July, the number of people in employment rose by 236,000 against the previous three month period. However, the underlying picture is rather less impressive. The number of full-time employees (arguably the best guide to the demand for labour) is down on a year ago while self and part-time employment have both increased. Reflecting this, it is not surprising that the Bank of England believes the existing slack in the labour market (evident by the 8% jobless rate) will keep wage growth subdued and exert further downward pressure on inflation. Indeed, while there was a small pickup in inflation in July, the rise to 2.6% was largely driven by increases in transport (particularly air fares). August’s figure eased back a touch to 2.5%, and we expect the rate to fall again in the coming months, before broadly settling around the 2% target in early 2013. The weak growth environment coupled with lower inflation leads us to believe that there is scope for further monetary stimulus. We expect the Bank to resume its asset purchase scheme in November, when the current round is set to end. One particularly worrying aspect for the government is the state of the public finances. In the first four months of the fiscal year, cumulative borrowing is running at around £10bn more than in the same period of 2011/12. The current forecast for the full year deficit is based on nominal GDP rising by 3.6% in 2012-13. This now looks way too optimistic and helps to explain why the fiscal numbers are so far adrift.